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It is common for clients to redeem their investments once their goals mature. However, there may be instances where they want to make untimely redemptions citing some urgency. But is this really urgent, or is it merely perceived as urgent?
To help your clients decide if their redemption need is genuine, Cafemutual reached out to several MFDs to create a ‘Redemption Checklist’. This is a four-point checklist that will encourage your clients to revisit their redemption decision and take an informed call.
#1 - Make them aware of market-related emotions - Ashish Modani of SLA Financial Solutions, Jaipur
Greed for profits and fear of losses are the most common market-related emotions. The change from greed to fear and vice versa takes place quickly with market fluctuations. Also, at times, withdrawals may result from herd mentality.
Here is where the concept of ‘Investor Performance’ becomes useful. Investor performance is nothing but returns generated as a consequence of choices that investors make. And when market-related emotions and other biases influence these choices, there is usually an underperformance.
No market-high or market-low is the final high or low and it keeps varying with the changing market dynamics.
#2 - Ask the right thought-provoking questions - Chokkalingam Palaniappan of Prakala Wealth, Chennai
Asking investors the right thought-provoking questions makes them reconsider their decision and consciously evaluate the pros and cons.
Such questions include - Why am I redeeming now? Is there an alternate way to arrange funds instead of making redemptions? Can I postpone the expense for which I considering untimely redemptions?
While it is important to sit down with investors and help them in answering these questions, it is equally important to allow them some time to individually reflect and reassess their answers.
#3 - Quantify the opportunity cost of premature redemption - Sachin Karate of Varad Financial Services, Nashik
In the financial world, numbers speak louder than words. Investors will find it difficult to comprehend the opportunity cost of redemption unless it is quantified.
Thus, it is ideal to mathematically illustrate how untimely redemption adversely impacts their wealth creation journey. When they realise the implications and how their action could lead to erosion of wealth, they will think twice before taking any hasty calls.
Also, citing some real examples of how a few investors failed to achieve their financial aspirations due to premature redemptions may compel them to give another round of serious thought.
#4 - Remind the concept of notional gain/loss and tax implications - Viral Bhatt of Money Mantra, Mumbai
At times, investors believe that booking profits or exiting to avoid further losses justifies untimely redemptions. However, they normally overlook the fact that what they see in their statement is merely notional and that redemptions have tax implications too.
Hence, it becomes necessary to remind them that notional gains/losses realise only upon redeeming. Thus, leaving the investment portfolio untouched is usually the right approach.
After all, markets operate in cycles and notional losses can eventually turn into gains over time as the markets bounce back. Also, realising notional gains makes sense only when there is an actual need as tax otherwise could reduce these gains.
